ULIP vs ELSS - Explore the Difference Between ULIP and ELSS

When selecting from tax-saving investment options, many investors often compare ELSS and ULIP, as both are eligible for tax benefits under Section 80C of the Income Tax Act. However, it is important to note that both options differ in structure, benefits, and risks.

In this article, we’ll understand the meaning of ELSS and ULIP and discuss the differences between both investment avenues.

Introduction: Understanding ELSS and ULIP

ELSS: The full form of ELSS is an Equity-Linked Savings Scheme. It is a type of mutual fund that primarily invests in equity and related investments. It is eligible for tax benefits up to ₹1.5 lakh as per Section 80C of the Income Tax Act, with a lock-in period of 3 years. This investment instrument provides exposure to equities, increasing the potential for higher returns.

ULIP: The full form of ULIP is a Unit-Linked Insurance Plan. It is a financial product combining insurance and investments. A portion of the premium paid for this investment avenue is allocated to provide life insurance coverage. The remaining amount is used to invest in various fund options, such as equity, debt or a mix of both. The lock-in period for ULIP is 5 years.

ELSS vs. ULIP: Key Differences Between Both Options

The following table is an overview of the differences between ELSS and ULIP. Below the table, we’ll explain each difference in detail.

Nature of Investement:

• ELSS or Equity-Linked Savings Scheme primarily focuses on investing in equities or equity-related securities, enhancing the potential for higher returns while saving taxes.
• ULIP or Unit-Linked Insurance Plan, is a hybrid financial product that combines insurance and investments. A part of the premium paid is allocated for life insurance coverage. The remaining paid amount is used for investing in various funds, including equity and debt funds or a mix of both.

Objectives:

• ELSS’s main objective is wealth creation, as the primary focus is on equity-related investments, enhancing the chances of higher returns
• ULIP provides an opportunity for life insurance coverage and wealth creation. The main objective of this investment instrument is to achieve long-term financial goals, like retirement planning, children’s education, and more.

Lock-in Period:

• ELSS has the shortest lock-in period among all tax-saving instruments under Section 80C, which is 3 years.
• The minimum lock-in period of ULIP is 5 years, even though the policy term could be much longer.

Features:

• ELSS provides flexibility in choosing investment amounts and timing, with no mandatory contribution required every year.
• A mandatory contribution of the agreed premium amount is required in ULIP. It allows fund switching to manage risk and return profiles.

Also Read: ELSS vs SIP

Tax Benefits:

• ELSS investments up to ₹1.5 lakh per annum are eligible for tax deductions under Section 80C. ELSS returns are subjected to Long Term Capital Gains (LTCG) tax, i.e., 10% on gains exceeding ₹1 lakh per annum.
• ULIP premium paid amounts qualify for tax deductions under Section 80C, up to ₹1.5 lakh per annum. The maturity proceeds and partial withdrawals are tax-free under Section 10(10D) if the sum assured is at least 10x the annual premium.

Risks and Returns:

• ELSS funds invest primarily in equities. Therefore, they are exposed to market risks making them highly volatile even if they have the potential for high returns.
• ULIP invests in various fund options, like equities, debt, and balanced funds. While equity funds carry high risk, debt funds are relatively stable. Therefore, the level of risk and returns totally depends on the type of fund option an investor chooses.

Fee Structure:

• The fee structure of ELSS is simple. It involves an expense ratio, that involves a certain percentage of the fund’s assets under management (AUM).
• The fee structure of ULIP is complex. The major costs involve:

Premium Allocation Charges: Charges deducted upfront from the premium of the plan.

Policy Administration Charges: Charges are deducted every month.

Fund Management Charges: Charges for managing equity funds.

Mortality Charges: Charges for providing life insurance coverage

Surrender Charges: Charges for early withdrawal or termination of the plan.

Flexibility:

• In ELSS funds, there is no flexibility to switch funds between the lock-in period of 3 years.
• ULIP has the flexibility to switch between different fund options during the term policy. However, they are subjected to certain conditions.

Summing Up

Deciding between Equity-Linked Saving Scheme (ELSS) and Unit-Linked Insurance Plan (ULIP) requires you to consider your financial goals, risk appetite, and investment horizon. ELSS is a good choice for someone who wants to focus their investment on equities to gain high returns with a shorter lock-in period. On the other hand, ULIP is a better option for someone who needs life insurance coverage, investment options, and the flexibility to manage their portfolio.

Remember, it is important to conduct thorough research and analysis or consult a qualified financial expert before making any investment decision.